Chron 200 / Company of the year: Chevron Corp. / Three-category leader: The big oil company that is accustomed to perching atop the revenue and profit charts is now the biggest in the Bay Area in terms of market capitalization

Contractors for Chevron drill for oil in deep waters off the Gulf of Mexico. Chevron has a spent a lot of time and money looking for new recourses in this area. Chron 200 portaits 3/28/07.
MIKE KEPKA / The Chronicle (cq) the source

Photo: MIKE KEPKA

Contractors for Chevron drill for oil in deep waters off the Gulf...

Chron 200 / Company of the year: Chevron Corp. / Three-category leader: The big oil company that is accustomed to perching atop the revenue and profit charts is now the biggest in the Bay Area in terms of market capitalization

The Bay Area is home to many mighty corporate titans whose annual sales and profits stretch into the billions.

And none of them made half of what Chevron Corp. made last year. Literally.

With oil and gasoline prices stuck at their highest levels in decades, San Ramon's Chevron brought in $210.1 billion in revenue in 2006. That far outpaced Hewlett-Packard, which came in second with $94.1 billion.

Same with profits. Chevron ended the year with a record $17.1 billion profit. Runner-up Wells Fargo & Co. made $8.5 billion.

Chevron has traditionally been The Chronicle 200's top company in terms of revenue and profit. Now it's also the Bay Area's biggest company in terms of market capitalization, worth about $162.2 billion at the end of March. Computer networking powerhouse Cisco Systems came in second.

Overall, the revenue for all Chronicle 200 companies totaled $909 billion in 2006, up $77.2 billion, or 9.28 percent, from $831.8 billion in 2005.

The key to Chevron's success in 2006? Crude oil prices. They rose as high as $77 per barrel on the New York Mercantile Exchange, averaged $66 for the year and never fell below $55. Just five years ago, people worried if the price topped $35.

But as hard as it is to believe when filling up for $3.29 per gallon, the majority of Chevron's profits come from pumping and selling crude oil, not refined gasoline. The same holds true for all major international oil companies. Of Chevron's $17.1 billion 2006 profit, $13.1 billion came from worldwide sales of crude oil and natural gas.

To Chevron and the other oil companies, current and future success hinges largely on finding and pumping more petroleum. Their profits and stock prices depend on being able to increase production, as well as to find new oil and natural gas deposits to replace everything they pump out of the ground. And it helps if some of that oil is in Asia, close to the ravenous economies of China and India.

Chevron's production gains in recent years didn't impress investors, with analysts saying the company lagged behind its peers. The need to improve those numbers drove Chevron to buy Unocal Corp. in 2005.

Chevron now has a slew of projects set to begin pumping oil and natural gas in the next few years, in the Gulf of Mexico, off the coast of Angola and in Central Asia. Those projects should increase production an average of 3 percent per year from now through 2010, according to the company.

Chevron Chief Executive Officer David O'Reilly said in an interview that the company also has enough long-term development projects in the pipeline to keep production growing. More than 30 projects will cost at least $1 billion to complete.

"The investments we make are investments that are going to be around for 30 or 40 years," O'Reilly said. "We think in terms of decades."

Wall Street is waiting for the results. "They've got a really good stable of projects on tap, but I think they were a little behind on getting those projects going," said Philip Weiss, senior analyst with Argus Research. "It's a lumpy process."

Nowhere is the company more active than in the Gulf of Mexico. Chevron has been probing for oil farther and farther from shore, in water 7,000 feet deep, and now holds more leases in the area than any other company.

Early last year, a drilling ship began boring wells at an offshore oil field called Tahiti. Production there should begin in 2008, eventually reaching 125,000 barrels of crude per day. The company last year also announced discovery of another oil field, farther out in the gulf, that could hold 3 billion to 15 billion barrels of oil and natural gas liquids. The proven oil reserves for the entire United States are estimated at 21.8 billion barrels, according to the federal government.

Chevron is devoting about 39 percent of its exploration and development budget to North America, which includes the gulf as well as projects in Alaska and the waters off Newfoundland. But the company also is betting heavily on offshore oil and gas fields near Angola, Australia and Thailand. About 25 percent of the company's exploration money goes to Africa, 19 percent to Asia and the Pacific.

Those areas all show great promise. They're also open to foreign investment. Much of the world isn't, at least not on terms Chevron and other international oil companies might like. Governments from Venezuela to Newfoundland have become more assertive about the deals they're willing to make with Big Oil, often demanding control over joint ventures and a far higher cut of the profit than they used to. National oil companies, such as Saudi Aramco or the National Iranian Oil Co., control the vast majority of the world's reserves, and they see less reason to seek Chevron's help in developing their resources.

"The game is changing," said analyst Justin Perucki with the Morningstar market research firm. "Now the national oil companies have built up enough expertise that they can do this themselves."

O'Reilly said the company still has plenty of room to explore, and more than enough projects to keep it busy. "This is an enormous business with enormous scale, and even if 85 percent of the opportunities are in the hands of the national oil companies, the 15 percent that is out there is an enormous opportunity."

He also said the company's oil production, at least for the next few years, should keep pace with the world's rising demand for petroleum. The international oil market, he said, is growing 1.6 to 1.7 percent per year.

"Of course, supply and demand are much more closely balanced today, because of economic growth, more than they have been in the last 20 years," O'Reilly said.

That tight balance is one of the main reasons world oil prices have stayed so high, bringing Chevron record profit in 2006. The company also benefited from a narrow supply-and-demand balance in gasoline, particularly in California. Gas prices spiked in the first half of 2006, rising more than $1.10 per gallon in California. The state's average for a gallon of regular set a record in May, at $3.38. The national average didn't climb as high as it did after Hurricane Katrina, but it came close, peaking in May at $2.93.

Profit margins at gasoline refineries rose along with pump prices. Refineries don't release precise profit figures, but by one rough tally, they were making $42 for every barrel of oil refined on the West Coast in May. The five-year average is more like $17.

Prices and profit margins then tumbled after it became clear the country had ample gasoline supplies to last through the summer driving season. But the gains earlier in the year were still enough to nearly double the amount of profit Chevron made from its U.S. refining, marketing and transport operations, which the company reports as a single figure. Chevron made $1.94 billion from refining and marketing in 2006, compared with $980 million in 2005.

Consumer advocates say Chevron and other refiners are squeezing drivers because they can. They note that the oil industry closed more than 100 refineries in the 1980s and 1990s, boosting the profit margins of those that remained. "As an industry, they made a decision in the early 1990s to reduce capacity," said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights. "None of this is necessary."

Oil industry representatives say the refineries closed because they were barely profitable and faced expensive upgrades to meet new anti-pollution requirements.

Since the wave of closures, many of the remaining refineries have been slowly expanding the amount of gasoline they can produce. Chevron is planning to upgrade its refineries in Richmond and El Segundo (Los Angeles County), potentially boosting the company's gasoline production in California by 840,000 gallons per day.

Standardizing gasoline formulas throughout the United States would allow supplies to move more easily from one place to another. California uses a gasoline blend that is found nowhere else -- one of the reasons for the state's chronically high prices. "We've advocated for change at the state level," O'Reilly said. "But advocating and getting the regulations changed are two different things."

Sales 25

Top 25 companies ranked by sales for the last four quarters available.